Feb 23, 2009

Britain’s debt crisis

GORDON Brown, suffered a double blow when government statisticians recalculated Britain’s national debt at £1.5tn and the Confederation of British Industry (CBI) accused the prime minister of lacking a coherent economic recovery strategy. As the prime minister warned in Rome that the world was being hit by an “economic hurricane”, his fightback plan at home was complicated when the UK’s Office for National Statistics raised the prospect of Britain’s national debt rising to 150 per cent of national income from its current 48 per cent. The ONS classified Lloyds and Royal Bank of Scotland as public corporations and thus added all their liabilities — up to £1.5tn — on to the taxpayer’s balance sheet. The ONS said the recapitalisations of Royal Bank of Scotland and Lloyds Banking Group meant they had in effect become public corporations, which would have to add the full extent of their liabilities to the national debt. The move, which the UK treasury dismissed as a “technical classification” with few policy implications, prompted Tory warnings that Britain was now facing a debt crisis. Kenneth Clarke, the shadow business secretary, called on Alistair Darling, the chancellor (UK finance minister), to introduce a dramatic reduction in the growth in public spending from this April, rather than waiting until next year. “We are going to quite staggering levels of public debt,” Clarke told the BBC. “The voters are going to have to pay the interest on all this mounting debt. This is a time for public sector restraint.” Richard Lambert, the CBI director general, said: “There’s little sense of a coherent strategy. It’s hard to remember, let alone distinguish between, the welter of initiatives that it has launched in the past couple of months.” Even the Bank of England’s deputy governor, John Gieve, joined the chorus of criticism, questioning coordination between the three bodies responsible for banking supervision. Gieve suggested that the Bank should be given the power to limit mortgage lending to rein in future property price bubbles. Public debt has already been swollen by around £90bn of Northern Rock liabilities and £50bn of Bradford & Bingley’s liabilities. But the two latest additions, which the ONS estimates could total between £1tn-£1.5 tn, would dwarf those. It was already widely expected that RBS’s liabilities would come on to the public balance sheet, as it is now 70 per cent owned by the taxpayer, but it is a surprise that Lloyds, which recently swallowed Halifax Bank of Scotland, has been classified as a public corporation as the state owns just a 43 per cent stake. Statisticians said, though, that it was not only ownership that mattered but the “ability to control” a company, and for that reason it had decided Lloyds should join RBS in the public sector. It said it did not yet have accurate information on the full extent of the banks’ liabilities because of the complex nature of the institutions. But the hit to the public finances will be backdated to last October, when the recapitalisations were announced. The ONS said it would also exclude the banks’ assets, other than very short-term ones like government bonds or cash holdings, in keeping with international statistical rules. A UK treasury source said: “This is an ONS decision on a technical classification issue. This doesn’t change anything in the real world.” Gemma Tetlow of the Institute for Fiscal Studies in London agreed: “This overstates the deterioration in the pulic sector balance sheet, because the government is not credited with the long-term assets of the banks.” The UK national debt is currently running at £700bn, or 48 per cent of national income. That is already the highest for more than 30 years.— The Guardian, London